It's Time to Drop Your Financial Advisor When...

I am starting a new series of posts titled "Funny Money". The goal is to have a little fun with the often too serious topic of personal finance.

Here is the first post in the series.

It's Time to Dump Your Financial Advisor When...

1. You swear you can hear an evil theme song and the roll of thunder every time he speaks.
2. He bursts into hysterical laughter whenever the topic of expense ratios comes up in a conversation.
3. He recommends investing in past commodities, since the futures commodities market hasn't happened yet and no-one is quite sure when it is expected to occur.
4. He is not quite certain but he thinks that sub-prime loans have something to do with borrowing a rib sandwich offered by a national sandwich chain. He also suggests the same company should introduce a sub-wings sandwich with chips and a soda.
5. When you ask him whether to sell a losing stock, he excuses himself and briefly turns away to consult his magic eight-ball.
6. When you visit his office he excitedly tells you that his new computer now allows him check stock quotes almost in real time. He also swears that he will soon have enough saved to afford that new fax machine thingy.
7. You find out the name stated on his birth certificate was Alfred E. Newman.
8. When you ask him about hedging he explains that since he hired his new gardener, he no longer has to do any of that sort of stuff himself.
9. When you inquire about the best way to fund your account, he suggests small, unmarked, non-sequential bills, preferably delivered in a brown briefcase.
10. He suggests with a straight face that you should invest in actively managed stock funds. No, really.

If you can think of any other excellent reasons to drop your financial advisor like a hot potato, be sure to leave a comment with your suggestion.

Also be sure to check back here next week for the next installment in the Funny Money series, I think this will be fun.

45% of Mail-in Rebates Go Unclaimed in 2006

According to a CNN piece I saw earlier today, 45% of mail-in rebates went unclaimed in 2006. That is a staggering number if you think about it, and it is exactly why rebates are offered in the first place.

If only about one half of mail-in rebates are claimed, a company that offers a $10 rebate, will only need to pay $5 in discounts on average. About half of customers will get a $10 discount, and about half will get $0 - but even those customers that do not claim their rebates make their purchasing decision based upon a discount they will never receive. This leads me to my main point: mail-in rebates are a form of discrimination against lazy people. Such financially lazy people use the rebate as a way to fool themselves into thinking that they are buying something for a lower cost than they do in reality.

Discrimination against lazy people is actually a very common practice in modern society. It does not end with rebates. For example: AOL used to offer free Internet service for a month. To get it you had to sign up for service, but could terminate at any time. Of course, many people are too darn lazy to remember to terminate on time, and then KA-CHING. The same is true for a vast range of services - from "free" credit reports to various "book of the month clubs".

A millionaire that I know made his fortune by selling travel packages to affinity groups (alumni associations, churches etc.), in the days before the Internet introduced us to the likes of Expedia. In one of our conversations, this gentleman told me that soon after he started his business, he discovered that one of the most profitable things he could sell was travel insurance. To sell more of it, he moved from an opt-in system - where he offered people the option to buy travel insurance, to an opt-out system - where he automatically quoted travel insurance as part of the package and gave people the option to NOT buy it. According to him, this minor change made all the difference and his profits soared. His lesson to me was simple: because people are lazy, they tend to allow decisions to be made for them by accepting a default position that is offered to them.

Lazy people let financial decisions happen to them. They make a decision, by not making a decision and thus hand control over their financial life to a someone else who may not have their best interests in mind. It is true for mail-in rebates, but it's just as true for many other other things in life. If you can't be bothered to get off your mental couch, expect people to reach into your pocket and help themselves to some of your hard earned cash.

Carnival of Personal Finance #94 & Festival of Frugality #68

It is live, but personally, I hate the format... it's just a bunch of links. But let me tell you what I really think... :-)

My recent post on Vegas, Gambling and Your Investment Strategy, was placed under the Motivation, Planning and Goals section. Not clear on why.

I also found this interesting article about What Do To with Large Capital Gains on the Laws of Finance. The article deals with what to do with an asset that will be subject to large amounts of capital gains tax upon sale, but which is not expected to perform well. From my perspective, this is yet another advantage of index funds - since by definition they are expected to perform as well as their market benchmark.

Another good one is Ben Stein’s Basic Rules of Retirement on Wealth Building Lessons. One of my favorites is: "Get and stay married to a sensible person". Another one that I don't think is a good rule of thumb, also it obviously applies in many cases is: "Buy your home".

A spectacular post that is not part of the carnival is The 20 Dumbest Personal Finance Questions of All Time from Punny Money. It is simply hilarious and highly recommended. Who says personal finance must always be a serious matter?

Festival of Frugality #68 is up. It includes my post on using credit cards to get out of debt. Also included in the Festival is this article from Money Smart Life about saving money on magazines. One of the tips - pick up magazines from the recycling bin. Dude. If you're that strung out, I will send you my own magazines. I will only go THAT far to save money.

Renting vs. Owning - Is the Balance Shifting?

A few days ago I found a site called Rentometer on Get Rich Slowly, one of my favorite personal finance blogs. The site lets you compare your rent to the prevailing rent in your area for comparable houses. Using this site, I found that our rent of $2,000 for a 3 bedroom townhouse in the heart of Silicon Valley was on the very low end of the rent scale.

Living in Silicon Valley, it has long been my opinion that owning a house is tough to justify economically. I even wrote a post about it recently ("Why Your House May Be a Bad Investment"). Even though my wife and I can afford to buy a house in this ridiculously expensive area, the house we can afford would not be a very nice one, and would consume an obscene portion of our portfolio.

However, I am starting to get the feeling that the economics may be changing. For one thing, real estate prices are flat and trending down, making a purchase more attractive. My thinking is that nominal prices will likely continue to decline slightly for the next two to three years, while inflation reduces the real prices more significantly. At the same time, my hunch is that rents will be increasing in the next few years. While interests rates were low and financing easy to obtain (even with a so-so credit score), many people opted to buy. Now buying may be more difficult for many, and those will be forced to rent. This means more demand for rental properties and a likely increase in price.

While the cost of owning a home is likely to decrease in the next couple of years, the cost of renting is likely to increase. This may be especially true for renters who are paying less than market rates, such as my wife and I (apparently). We will see how this whole thing plays out, but it may be that owning will be the financially sound decision of the next few years.

How to Negotiate a New Job Offer

In my post from two days ago I wrote that my wife accepted a job offer from a new Silicon Valley tech company. The new salary she was offered was literally twice her current compensation, however that was after she negotiated an increase from the company's first offer. Here are some of the principles we used in renegotiating the offer:

1. Never Take the First Offer - as someone who has both hired people and who has received an offer or two in his life, I can tell you with a high degree of confidence that the first offer you receive from a company is never the best you can get. Hiring managers expect you to negotiate, and for that very reason leave some room for concessions. My wife was worried that if she tried to negotiate she would lose an offer she was really interested in. If you follow the strategy proposed below, losing your offer is a very remote possibility.

2. Negotiate Only if You Intend to Accept the Offer - always negotiate in good faith. If you have no intention of accepting the offer anyway, don't waste everyone's time by making demands. Say "no" and move on. Negotiating without intent to accept is unfair to the hiring company who gave you an honest offer.

3. Be Honest - Do not lie. If you don't have another offer, don't pretend that you do. If you have multiple offers, don't over-sell them. The last thing you need is to start with a new employer on the wrong foot.

4. Ask for What You Want to Get - don't sell yourself short. Ask for what you think is going to make you happy, not what you think the new company will agree to. I would even say that if the company immediately agrees to what you are asking for, you are probably asking for too little. Of course, don't be ridiculous in your demands. In our case, the new company immediately agreed to my wife's request for an extra $10K in salary, which basically tells me that we should have asked for more. Nevertheless, my wife is very happy, and that is the MOST important thing.

Keep in mind that getting a better offer before you join the company is much easier than getting a raise once you have already joined the company. Before you accept the offer, you have all the power and the company is courting you. After you accept the offer and start working, the company knows that switching jobs is not a simple task, and therefore will be less inclined to agree to your requests. How easy do you think it would have been for my wife to get a $10K increase to her salary within six months of her start date? Extremely hard is the right answer. Getting that "raise" before starting to work was a breeze.

6. Be Matter of Fact - when asking for the improved offer, be matter of fact. Don't threaten, don't plead, explain what you want and then shut up. For example, consider something like: "Thank you for the offer. I currently have two offers to choose from. I prefer your company over the other one I am talking to, and will accept your offer if you increase the salary package by $3,000". Don't over-explain your request. Give the company a "carrot" by making it clear that you will accept the offer if your requests are met.

7. Don't Paint Yourself into a Corner - Don't say that you will walk away from the offer if your demands are unmet, unless you really intend to reject the offer in that case. Regardless, doubt is a much more effective tool than an ultimatum. Rather than saying you intend to walk away unless you get what you want, consider saying that getting what you want will simply make the decision much easier for you.

It took some convincing, but after my wife agreed to my suggestion that she should negotiate her offer, she not only got the $10K increase she wanted, she also got an increase in her expected bonus. Since her compensation package stipulates a 10% bonus, the increase in base salary will also translate into an extra $1K per year in expected bonus payments. An outstanding return for a 15 minute phone conversation.